STRENGTHS

WEAKNESSES

Restrictions on movement in the West Bank imposed by Israel, and blockade of the Gaza Strip by Egypt and Israel

Stalemate in the peace process with Israel

RISK ASSESSMENT

Weak growth in 2018

After a recession in 2014 and 2015 because of the war in Gaza, the Palestinian economy is recovering. In 2018 the growth rate is expected to be the same as in 2017 - the Palestinian economy continuing to suffer the consequences of the war. The unemployment rate in Gaza is 42%, whereas the national average is 27%, evidence of the strong disparities between the West Bank and Gaza. Economic growth in the south is mainly driven by reconstruction efforts while in the West Bank the main component of economic activity is private consumption (+5% expected in 2018), which benefits from easier access to credit (+22% in 2017) for individuals. Assuming the peace process will still be blocked in 2018, restrictions on trade as well as on access to resources will still apply. Since April 2017, the population has had only limited access to electricity and water treatment stations are only partially operational. The agricultural sector is in decline and the situation is unlikely to improve in 2018 This is because only 21% of cultivable land is in use due to structural problems relating to irrigation, Israeli restrictions on the import of fertilisers and subsidised Israeli competition. Public investment remains weak, at a level close to 2% of GDP according to the UN, and depends almost exclusively on international aid. Private investment is higher, even if the level remains stable (16% of GDP in 2015 and 2016), mainly driven by reconstruction activities. Inflation is expected to remain weak in 2018, thanks to the appreciation of the Shekel.

The public and external accounts remain fragile

The Palestinian Authority’s (PA) public finances remain dependent on relations with the Israeli government. Spending on wages is high, accounting for 59% of total spending in 2017. The drive to rationalise spending will continue in 2018, but the PA has less room for manoeuvre in a chaotic humanitarian context. Moreover, international aid, a major source of finance, is likely to remain at relatively low levels, having fallen by 38% between 2014 and 2016 and by 12% in 2017. Nevertheless, the fiscal deficit is expected to stabilise in 2018, thanks to the major contribution made by weak spending on electric power (Gaza Strip). In 2018, the PA is expected to finance a growing proportion of its deficit by borrowing from domestic banks.

The external accounts remain dependent on Israel’s economic cycle. The reason is that trade with Israel accounts for over 70% of imports and 80% of exports. Palestine exports mainly very low value-added products such as stone (for construction) and agricultural products. The trade deficit, one of the largest in the world, is explained by the difficulty the agricultural and industrial sectors have in penetrating the external market as well as the difficulties resulting from Israeli and Egyptian restrictions. The lack of a national currency creates a dependency on Israeli monetary policy and the Shekel’s appreciation in recent years has reduced the very low price competitiveness of Palestinian producers. The 18% drop in FDIs in the first half of 2017 means it will not be possible to offset the current account deficit.

Towards status quo in 2018

Re-elected in November 2016, Mahmoud Abbas (82 years), president of the PA and of the Palestinian Liberation Organisation PLO), controls the West Bank while Hamas, led by Ismail Haniyeh has controlled the Gaza strip since being democratically elected in 2007. In April 2017, the PA decided to no longer pay for Gaza’s electricity because of its disagreement with Hamas, resulting in a serious humanitarian crisis. In September, the leaders of Hamas were ready to negotiate a peace deal with Rami Hamdallah’s government in order to break the deadlock after a decade of tension between the two main political forces. Following a meeting in Cairo, in October, Hamas agreed to stop managing public affairs in Gaza and talks aimed at reconciliation and the establishment of a government of national unity were launched. The Israeli government then declared that it was not prepared to negotiate with the Palestinians until Hamas had laid down its arms and recognised the Jewish State.

The status quo is therefore expected to prevail in 2018, as the Fourth Netanyahu government is opposed to the creation of a Palestinian State and a resolution of the conflict is not a priority for US President Donald Trump who is not committed to a two-state solution.

Regarding the business climate, according to the World Bank’s Doing Business 2017, the Palestinian Territories are ranked 140th (out of 190).